Oil prices surged as energy and commodity markets were thrown into disarray after Western nations unleashed more sanctions to isolate Russia following its invasion of Ukraine.¹ Brent futures have jumped over 10% on concern that oil supply — already stretched amid rebounding demand — may tighten further should Russian flows be disrupted. Some customers have paused purchases of the country’s flagship Urals grade, while Asian buyers are trying to secure more Middle Eastern crude.

Western nations agreed over the weekend to exclude some Russian lenders from the SWIFT bank messaging system and targeted the central bank’s foreign reserves. BP Plc also moved to dump its holding in oil giant Rosneft PJSC, taking a financial hit of as much as $25 billion.

Russia’s invasion of Ukraine has roiled markets from energy to metals and grains, heaping more inflationary pressure on a global economy already grappling with soaring costs. At least two of China’s largest state-owned banks are restricting financing for purchases of Russian commodities, underscoring the limits of Beijing’s pledge to maintain economic ties with one of its most important strategic partners in the face of Western sanctions.

Two-Year Lookback

Two years ago, oil was trading near a respectable $60 a barrel, when traders and executives were becoming concerned about the new respiratory virus circulating in China — it had after all just forced the cancellation of many parties at London’s annual International Petroleum Week.² Yet nobody realized the scale of the calamity that was bearing down on the oil market.

By mid-February 2020, analysts at the Organization of Petroleum Exporting Countries were predicting a modest reduction in global demand growth due to COVID-19. Within a few weeks, a devastating wave of infection spread across the world, and fuel consumption collapsed by more than a quarter.

The OPEC+ price war was short lived. After just a month, the cartel resolved its differences and agreed to the biggest production cuts in its history — a deal brokered by President Donald Trump — but the damage was already done. The world’s oil infrastructure started to choke on the flood of crude unleashed by Saudi Arabia. By the end of March, the price of a barrel had reached $20 and was still falling.

The defining moment of the slump — an event many market veterans would scarcely believe they were seeing — came on April 20, 2020. West Texas Intermediate crude, the U.S. benchmark, dropped to minus $40 a barrel. In places, oil had become akin to a waste product, something you had to pay people to take away.

WTI Strip Prices Increase

Spot prices and futures prices for the WTI contract increased by approximately $17.00 per barrel in the near term and approximately $3.00 per barrel over the longer term.

Oil Strip Prices - One Month Change

The oil price curve remains in “backwardation,” reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on March 1, 2022, as well as the predicted crude oil prices based on options and futures markets. Blue lines are within one standard deviation (σ) of the mean; red lines are within two standard deviations.

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $73.00 and $132.00 per barrel in mid-Jun 2022. Likewise, there is roughly a 95% chance that prices will be between $46.50 and $215.00. By mid-Aug 2022, the one-standard-deviation (1σ) price range is $66.00 to $130.00 per barrel, and the two-standard-deviation (2σ) range is $39.00 to $215.00 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. The heightened volatility caused by recent events have led to extraordinary futures ranges. While the mid-August 2022 settlement price is $88, the 1σ range has a spread of $64, and the 2σ range has spread of $176.

1. Oil Soars as More Sanctions on Russia Spur Energy Crisis Fears, EnergyNow.com, February 28, 2022
2. Oil's Spectacular Covid Crash Set the World Up for $100 Crude, EnergyNow.com, February 17, 2022